It’s easy to see what billionaire hedge fund managers buy and sell each quarter. Although you usually can’t watch it in real time, hedge funds are required to file a quarterly update with the Securities and Exchange Commission (SEC), and these filings are publicly available.
It seems like a good idea to check which stocks billionaire managers are buying and selling. But is this the case?
John Overdeck and David Seigel of Two Sigma Investments and Michael Burry of Scion Asset Management both sold shares of Grill (NYSE:TOST) action. Two Sigma reduced its position by 47% and Burry sold his fund’s entire stake. Should retail investors follow suit?
The toast heats up
Toast operates a management platform for restaurants. It connects all services into one easy-to-use application and includes hardware and software. These include services such as supply management, menu selection, payment processing, etc. Everything synchronizes for an efficient and automated system.
It’s easy to see why this could be very attractive to restaurants. For restaurants that still use legacy accounting software and pen-and-pad ordering, Toast’s system speeds up processes and ultimately saves money. Toast offers numerous tiers and packages targeting all types of restaurants, such as a cafe, pizzeria or bakery, with a vertically integrated program that can improve overall operations.
It’s no surprise that Toast has added tons of new locations and generated higher sales. Average recurring revenue (ARR) increased 32% year-over-year in Q1 2024 and added 6,000 new locations during the quarter for a total of 112,000.
Is Toast toast?
From an investor’s perspective, Toast runs an interesting business. It has a strong recurring revenue stream with a software-as-a-service (SaaS) model, and once a customer signs up, there are SaaS fees as well as payment processing fees. That’s why his favorite primary metric is ARR.
There is also a healthy network effect that fuels the company’s growth, and it has been able to increase sales without increasing marketing expenses. Seventy-five percent of new business comes from inbound channels, with 20% coming from customer referrals. It’s gaining an even larger share of new restaurants that don’t have traditional operations and are opening with technology-based management systems.
So why are billionaires selling Toast stock? Toast’s main problem at the moment is continued losses. Its net loss increased in the first quarter to $83 million this year from $81 million last year, although that was due to restructuring measures. Free cash flow was negative $33 million, although that was an improvement from last year’s $65 million.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) turned positive and is increasing, and management expects free cash flow to be positive for the remainder of the year. It also expects operating profit (based on generally accepted accounting (GA) principles) to break even by the end of the year.
Toast stock is up 9% over the past year and 26% so far this year. However, it is having great difficulty returning to its previous highs, and it remains more than 60% of the 2021 highs.
Right now, there is a risk that growth will slow before Toast becomes profitable, making it difficult to scale without increasing expenses. Many restaurants are reporting slow growth in this economy, and Toast’s growth relies on restaurants investing in their own growth. If restaurants feel pressure, it will eventually trickle down to Toast’s business as well.
Buying Toast now is a long-term gamble that requires a little patience. Hedge fund managers don’t always invest this way. They have different goals than the individual investor, and if they got what they wanted with Toast stock, or if they feel it doesn’t meet their expectations at the moment, they might decide to withdraw and move on.
Hedge funds are not retail portfolios
This is why following the movements of hedge funds is not always the best strategy. Hedge fund managers have an obligation to report short-term gains and maximize their investors’ funds every quarter. Many funds own thousands of stocks and frequently rebalance their composition to reflect specific objectives. Scion currently only owns 16 stocks, but Two Sigma owns more than 2,000, including alternative investment types.
For the long-term focused individual investor, Toast seems like an attractive buy, and I wouldn’t worry too much about some billionaires currently selling it.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool posts and recommends Toast. The Motley Fool has a disclosure policy.
Billionaires decide to sell shares of this well-known stock was originally published by The Motley Fool